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Ship Mortgages in Nigeria Legal Problems

I know Gbolahan Elias I know his friend Fred Onuobia. They are two
geniuses working together.

It is a great humour for me to be asked to comment on the paper prepared
by Fred Onuobia. What can I stay but to concur with all that he has
written?

I shall add what Gbolahan would call my own agenda as a body filler!.

My comments shall dwell on how the Nigerian Courts have dealt with issues
/ problems relating to ship mortgages and allied matters.

1. SHIP MORTGAGES AND ACTION IN REM:

A. THE RIGHT OF THE MORTGAGEE IN AN
ACTION IN REM.

In understanding how the Nigerian Courts have dealt with the issues
relating to ship mortgages, perhaps a good starting point would be to
investigate some of the earliest cases and questions on ship mortgages which
have come before the Nigerian Courts, beginning from the early days of the
nations history.

a. Quere:
(i) Whether mortgage sum must be ascertainable?

(ii) Whether the sum secured must be due at the

time of suit?

The question has arisen whether the sum secured by a mortgage must be
ascertainable before the mortgagee can bring an action in rem.

Another question is whether the sum secured by the mortgage must actually
be due at the time the in rem action is filed.

The Nigerian Courts have decided that the simple answers to these
questions are as follows:-

a. A Mortgagee who wishes to bring an action
in rem against a defaulting borrower (Mortgagor) must ensure that the sums that
were secured by the mortgage must be capable of being ascertained.

b. Secondly that the ascertained sum of
money must actually be due at the time the mortgagee makes his claim or files
his action against the defaulting mortgagor / borrower

How did the Courts come to these conclusions? – it was through a case
which went from the Federal Supreme Court in Lagos up to the Privy Council
in London.
This was in the heydays of British colonial power – shortly after our
independence when appeals laid from our Supreme Court to the Privy Council in
England.

The name of the case is Banque Genvoise de commerce et de Credit. v.
Compania Maritime de Isola Spetsa Limitida (1907) 1 NSC 68. It’s a
case of the Swiss versus the Italians. The Arena was Lagos. The Swiss are
very shrewd and skilled bankers. Their expertise in this trade is reknown.
Naturally an agreement by a swiss bank to secure any loan is water light.
Consequently, a swiss bank would move faster than the speed of light to enforce
its security. This time, it moved too fast, and too soon, !.

This is what happened:- In 1958, the Geneva Bank of Commerce and
Credit (Banque Genevoise de Commerce et de Credit) loaned S292.790 (Two Hundred
and Ninety-two Thousand Seven Hundred and Ninety pounds Sterling) to Italian
ship owners (Compania Maritime de Isola Spetsai Limitida. The vessel
“SPETSAI PATRIOT” was mortgaged to the bank as security for the loan.
The deed of mortgage was registered in Liberia. The monies secured by the
Mortgage were to be repaid by installments in 1958 1959. The shipowners did
not pay any instalments, whatsoever on the due date or at any other time.

In 1962 the vessel sailed to Lagos. On
the 30th June 1962 while she was in Port in Apapa the bank
arrested her. The bank sued for S 380.627 (Three Hundred and Eighty
Thousand Six Hundred and Twenty-seven pounds sterling) which was the whole money
secured by the mortgage plus interest and bank charges.

Were the Italian Shipowners owing this money?. They contended that
they were not !. They in fact said that the terms of the 1958 mortgage had
been changed by an agreement dated the 26th October 1961, between
the bank and its subsidiary on one hand, and the Italian Shipowners, their
Managing Director, and the American Trading Company of Panama, on the other
hand. They also contended that the 1961 agreement was a novation of the
1958 agreement and that 1961 agreement had infact rescinded or revoked the 1958
deed of mortgage!

The Federal Supreme Court studied the 1961 agreement. The court
asked many questions. Both parties admitted that the 1961 agreement was
indeed valid. Based on its understanding of the 1961 agreement the Federal
Supreme Court held in favour of the Shipowners.

The court dismissed the bank’s action in rem. The bankers were
dissatisfied. They appealed to the Privy Council in
London. They contended as follows: -

a. That under the
1961 agreement, the term
of the 1958 deed of mortgage was still in operation with the substitution of a
new mortgage sum and new date of repayment.

b. That the 1958 mortgage deed required that
the Shipowners comply with S.4 of the Liberia Maritime Code i.e not to do or
permit to be done anything which might injuriously affect the registration of
the vessel and to maintain the vessel in good running order and repair.

c. That the shipowners were indeed in
breach of the S.4 Liberia Maritime Code.

The shipowners on the other hand relied on Article 2(d) of the 1961
agreement which provided that two new mortgages should be given as security by
the shipowners in favour of the American Trading Company of Panama. The mortgage
sum was S50,000 (Fifty Thousand pounds sterling) each for the vessels “SS
Spetsai Patriot” and “SS Spetsai Navigator”.

From the evidence before the Federal Supreme Court, it was clear that under

the 1961 agreement, the parties rounded up all the sums owed by the

shipowners to the bank as S300,000 (Three Hundred Thousand Pounds

Sterling.
These sums were to be paid from assets of the Shipowners

enumerated in Article 2 (a) (b) of the agreement – the estimated value of
all

these assets were put at S275,000 (Two Hundred and Seventy-five Thousand

pounds sterling).

Article 6 of the agreement stipulated that the two mortgages mentioned
above

were only to be used to secure payment of any sums left after those assets

have been realized. Therefore if the assets sold, realized all of the
S300,000

nothing would be due or recoverable under the mortgages.

But if the assets realized less than the estimated value, then the
Panamanian company could use the mortgages to make up the balance of S300,000–
but using a maximum of S50,000 on each mortgage.

Article 6 of the agreement provided that the assets could not be realized
before one year i.e not before
26th October 1962. For this reason the agreement allowed
the first installment of the sums secured by the mortgages to become payable on the 1st November 1962.

However, by 30th June 1962, the
Bankers had arrested the vessel at
Lagos
and filed an action in rem. The year had not elapsed. The assets had not been
realized. The banks move was four months premature!.

This is what Lord Reid said, in dismissing the appeal:-

“Normally a mortgage is granted to secure payment of a specified sum. The
date of payment is merely postponed and if by reason of a breach, of a condition
in the mortgage, the mortgagee becomes entitled to immediate payment, he can sue
for payment of that sum. But in this case, there was no ascertainable sum
secured by the mortgage and no sum due until the year had elapsed and it was
seen by how much the sums realized form the other assets fell short of S300,000.
So when the vessel was arrested on June 30th 1962, and the present action was raised a
few days later, no sum had become ascertainable or due.

Nothing would have been recoverable if the new mortgage had been granted
under article 2(d) and nothing was recoverable by virtue of the old mortgage.

As the present action is to recover a sum of money and no sum had become
due, or ascertainable when it was raised, it must fail”.

WHETHER THE MORTGAGEE IS ENTITLED TO MORTGAGE INTEREST WHICH ACCRUE DURING IN
REM

PROCEEDINGS

The case of National Bank of Nigeria Ltd .v. Okafor Lines Ltd No 2
(1979) 2 NSC 90 is authority for the proposition that where mortgage interest
accrues during in rem proceedings, against the ship, the mortgagee can sue the
mortgagor in personam to recover the interest

2.
SHIP
MORTGAGES MARITIME LIENS

In the 1960’s, National Bank of Nigeria Ltd, was one bank in Nigeria that was the ship owners friend.
I don’t know if that friendship is still maintained today. Unlike many others
today, it did not shy away from financing maritime ventures. In the process of
championing maritime finances, it met a customer called Okafor Lines Ltd. Its
dealings with the customer led to a Saga, which richly developed the law on ship
mortgages in Nigeria

a.What
is the effect of a lien on the rights of the mortgagee

The Saga began on the 3rd June 1966.
There was trouble in Eastern Nigeria. The
Biafran War was just brewing. At this time, Lagos was the capital of Nigeria.
Lagos was still calm. It was
the season of the rains too. People were going around minding their own business
in this city of boundless energy. The colour of money did not recognize the
drums of war.

Okafor lines was doing very good business, inspite of the political
uncertainty in the atmosphere. It wanted to purchase a vessel the “SS Chief
Awosika” It approached National Bank for a facility. The bank was happy to
oblige. The parties entered into a mortgage agreement dated
the 3rd June 1966. Okafor lines Mortgaged the vessel as
security for the loan.

Under the mortgage deed, the bank had the right to call in the principal
loan and the interest upon the happening of certain events of defaults by Okafor
Lines.

Okafor lines did not pay its port charges and harbour dues. The Nigerian
Ports Authority promptly impounded the “SS Chief Awosika” and sold it by order
of court!

The bank brought an action to recover the principal loan and the interest
under the ship mortgage in the case called National Bank of Nigeria Limited
.v. Okafor Lines Limited No 3 (1979) INSC 110

The questions before the court inter alia were:-

(a) Whether the mortgagee had a right to recover
its debt after the security had been sold by a third party

(b) The effect of a lien by a third party on the
rights and interest of the mortgagee.

The court answered the first question in the affirmative. As regards the
second,

it held that the rights of the mortgagee should be satisfied in priority
to the lien

Taylor C.J at page 112, answered the questions as follows:-

“the learned author of Roscoe’s admiralty practice 5 Roscoe’s admiralty practice 5th ed, at
pg 93 (1931) states as follows on the rights of the mortgagee of a ship”:-

“The mortgage gives him (the mortgagee) a right to the actual possession
of the ship at any time after the debt is due, and even before the debt is due,
if the property is being dealt with in such a way as to impair the security and
he is entitled to sell it as free from incumberances, even though there may be
an agreement between the martgagor and third parties in regard to the working of
the ship of which he had no notice”.

In the case before me, not only has the security been impaired, by the
lien created in favour of the Nigerian Ports Authority, the security has been
auctioned and sold and consequently lost to the Plaintiff’s as a security for
the sums advanced to the Defendants”.

In the circumstance, the plaintiff mortgagee was held to have a right of
action to recover both its principal and interest advanced to the mortgagor –
defendant.

b.Maritime Lien Priority of
Mortgages

The lien in question in this case can now be classified as a general
maritime lien within the meaning of S 2(3) (n) Admiralty Jurisdiction Act 1991
.i.e. a claim in respect of a liability for port, harbour, canal or light tolls
charges or dues, or tolls, charges or dues of any kind in relation to a ship”.

In this case the ship mortgage was held to have priority over the third
party lien such that although in a separate action NPA .v. Okafor Lines Ltd
mentioned at (1979) INSC pg 112 the NPA’s application for its dues to be
paid out of the sale of the mortgaged vessel was allowed, the actual payment was
suspended until consideration and final determination of the mortgagee’s claim
in National Bank of Nigeria .v. Okafor Lines Ltd No 3. The mortgagees
claim was the first preferred mortgage, and its terms and satisfaction were held
to be in priority to that of the NPA.

3.ACCRUAL OF THE MORTGAGEES RIGHTS

a. RIGHT OF ACTION

The law is that the mortgagees right of action accrues only after the
whole mortgage debt has been advanced.

i declaration that its right under the mortgage agreement of
33" Month="6" w:st="on">
3rd June 1966 were vested and exercisable.

ii. a declaration that Okafor lines
was in breach of the covenants in the mortgage deed and so the bank was entitled
to possession of the “SS Chief Awosika”.

iii. The sum of S501,162,12s. 3d (Five Hundred and One Thousand, One Hundred and Sixty-two Pounds, Twelve Pounds
Shilling and three pence) as money due to the bank from the shipowers on banking
facility granted to the shipowers in pursuance of the mortgage agreement.

At this time the Nigerian currency was the English pounds shillings and
pence. It was the days when twelve pence made one shilling and twenty shillings
made one pound!.illings
made one pound!.

The Nigerian currency was in good standing with the Bank of England. In
todays terms the bank’s claim would be astronomical.

The mortgage deed provided for events of default and remedies in case of
default.

Okafor lines also signed and deposited a promissory note with the bank.
One of the conditions of the mortgage deed was that if the shipowners made a
default in payment of charges fines and penalties then the bank could resort to
the remedies listed in the deed.

There was evidence that Okafor Lines owed the Nigerian Ports Authority
certain sums, in respect of harbour dues and mooring dues. These were regarded
as defaults. Therefore the bank contended that since such default had occurred
it was entitled to bring an action in law, equity or admiralty to recover
judgement and declare all the principal sum outstanding and interest there on to
be due and payable immediately without regard to the maturity date stipulated
the mortgage deed.

The shipowners contended that since the entire loan which was being
advanced by installment had not been totally advanced by the bank interest on
the advanced loan could not be due and that they were therefore not in breach of
any of the covenants in the mortgage deed.

Taylor C.J. considered both contentious carefully. It is interesting to
note the exact wordings of the relevant portions of both the mortgage deed and
the promissory note and see how the court solved the problem.

S.2 of the mortgage deed stated that:-

“That ship master is firstly indebted to the mortgagee in the sum of
S470,000 (Four Hundred and Seventy Thousand Pounds Sterling) lawful money of the
Federation of Nigeria, evidenced by the promissory note”

The promissory note itself provided as follows:-

“For value received the undersigned Okafor Lines Ltd, a Nigerian
Corporation (“The Company) promises to pay on June 2nd 1972, to the
order of the Nigerian National Bank Ltd (“the Bank) at its principal office in
Lagos, Nigeria or such other address as the holder thereof may designate in
lawful money of the Federation of Nigeria, the principal sum of S470,000
together with interest at the rate of 10% per annum on the said principal sum
remaining from time to time unpaid. The principal sum, having been advanced to
the company in installments interest shall be payable on each advance of the
principal sum from the date such advance was made”. The action was dismissed as
premature.

There was evidence that at the time the writ was issued the bank had
advanced the sum of S458,078.19s.7d but not yet the principal sum of S470,000 as
stipulated in the mortgage deed. Consequently the court held that since the
whole mortgage debt had not been advanced to the shipowners and there was no
evidence of the shipowners debt to Nigerian Ports Authority in respect of the
particular vessel in question, there was no default of the mortgage and the
mortgages right of action had not accrued.
b.
Right to possession of the ship

National Bank of Nigeria Limited .v. Okafor Lines Ltd No 2 (1997) 2
NSC also decided that the main right of the mortgagee of a
ship or holder of a majority of share in a ship is the right to take possession
of the ship which he may do even before any part of the

debt is due if his security is being or will be seriously
impaired in some material way by remaining in the mortgagor’s possession.

4.THE COURTS AND THE MERCHANT
SHIPPING ACT

From the foregoing, it is clear that in resolving problems of ship
mortgages, the courts have not necessary used the provisions of the Merchant
Shipping Act, but have used the evidence before it.

In NPA .v. Okafor Lines for Lines NPA did not seek the Ministers consent
before selling the vessel “SS Chief Awosika”, that was owing harbour due and
mooring fees.

It is interesting that as a mortgagee with a power of sale National bank
never made any application to sell the vessel SS Awosika, even though it could
have done so before the NPA impounded the vessel.>

In National Bank .v. Okafor Line Ltd No 2:- the court
had observed that although S. 19(e) of the deed of mortgage dated 3rd
June 1972, gave the mortgagee bank the right of sale of the vessel, this right
was not claimed in the banks writ of summons could it be that the bank was
mindful of the provisions of the merchant shipping Act where the mortgagee is
said to require the ministers consent before effecting a sale of the mortgaged
vessel S. 326(2) MSA?. Such a provision works contrary to commercial efficiency.

The practicality of commercial transactions and court proceedings seem at
variance with the requirement that the Ministers consent is necessary before a
sale of vessel can be effective.

In the case of Benzenne Nigeria Ltd .v. Nigerbrass Shipping Line Ltd
(1993) 4 NSC 237 one of the questions for determination was whether or not
the consent of the Federal Government was necessary for sale of a Nigerian
Flagged Ship.

Aina .J. was quite emphatic in the rejection of any prosposition to the
effect that the Federal Governments Consent was necessary before a Nigerian
Flagged vessel could be sold.

This is how he expressed his displeasure at such a proposition of page 242

“I also find it untenable, the proposition that a Nigerian vessel cannot
be sold without the consent or approval of the Federal Government of Nigeria.
Possibly what learned counsel has in mind is the sale of Federal Government owed
vessels or Nigerian Navy Vessel”.

In the same vein, I am in total agreement with Mr. Onuobia that it is an
impediment on the freedom of contract to require the ministers consent either to
create a ship’s mortgage or to realize that security.

Perhaps just as the learned Justice Aina said above, it appears that at
the time the Merchant Shipping Act was enacted the legislature had only the
Government owed vessels in mind. In todays commercial environment S. 323,
and S.326 of the MSA are some what unrealistic

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